Mortgage Escrow Accounts
Consumer groups are always raising cane about the escrow deposits required by most mortgage lenders. They want refunds, they want interest paid on the accounts or they want them eliminated altogether.
History tells us that escrow accounts first appeared in the early 1930s when many Americans began losing their homes because of late tax payments. In 1934 the Federal Housing Administration (FHA) made escrow accounts mandatory for loans it insured. Other lenders soon followed.
Today, most lenders collect escrow for taxes and insurance by requiring a small monthly escrow payment along with the mortgage payment. The lender then uses this money to pay the tax and insurance bills when they come due. Homeowners are protected from lapsed insurance or past due taxes.
Escrow accounts are regulated by the Real Estate Settlement Procedures Act (RESPA) of 1974 and administered by the US Department of Housing and Urban Development (HUD). Lenders are must meet certain requirements for handling your escrow fund.
Escrow accounts are set up when you close on your mortgage loan. The lender may require that you pay up to two months of escrow in advance as a cushion for the escrow account. This would include premiums for homeownersí insurance, mortgage insurance and flood insurance. Taxes are also collected based on when taxes are due.
Tip: A word about taxes. Each November lenders pay property taxes to the county government on behalf of borrowers. Taxes arenít really due until year end but local governments offer a discount if they are paid early. All lenders take advantage of this discount to save you money. The amount of tax that must be collected at closing will depend on how much time is left until November.
Thus, if you close in June you will have only four months until taxes are due. That means the lender will want at least eight months of taxes paid at closing. That money will go into the escrow account to pay taxes in November.
But since you bought the house in June, the seller is liable for the taxes from January 1 until the date of sale.
That amount of money will be computed by the closing agent and credited to you on your closing statement.
Insurance premiums are treated differently. Most lenders require you to purchase your homeowners insurance in advance of closing. Typically such insurance policies have annual premiums and thus you will have a year to accumulate the next payment. The same is true of flood insurance. If your home is determined to be in a flood zone, you will be required to purchase flood insurance. Premiums are collected in the same manner.
Most lenders will require two months of insurance premiums be paid into escrow at closing. The purpose is to provide a cushion in the event insurance premiums are increased. You should know that lenders are not permitted to collect more than a two-month premium in advance.
How do you keep track of how much money you have in escrow? Lenders are required to issue itemized statements of escrow accounts to borrowers within thirty days of the end of the year. Hereís what you should get:
1. A copy of the previous yearís projection or initial escrow account statement.
2. The annual escrow account statement must provide an account history, reflecting the activity during the escrow account computation year.
3. A projection of the activity in the account for the next year. In preparing the statement, the lender will assume scheduled payments and disbursements will be made for the final two months of the escrow account computation year.
4. The amount of the borrower's current monthly mortgage payment and the portion of the monthly payment going into the escrow account.
5. The amount of the past year's monthly mortgage payment and the portion of the monthly payment that went into the escrow account.
6. The total amount paid into the escrow account during the past computation year.
7. The total amount paid out of the escrow account during the same period for taxes, insurance premium, and other charges.
8. The balance in the escrow account at the end of the period.
9. An explanation of how any surplus is being handled by the lender.
10. An explanation of how any shortage or deficiency is to be paid by the borrower. There are a few options the lender has in collecting the shortage. First, they may require payment in full within sixty days. Or second they may spread the payments out over the next twelve months.
11. If the lender underestimated your escrow for the past year, the lender must provide an explanation of why the payments were not enough.
Tip: If there are excessive funds left in escrow, the extra money must be refunded to the borrower within 30 days of the analysis. Excessive is defined as greater than $50.00. For amounts less than fifty dollars the lender may refund the money or credit the amount against your next year's escrow payments.
What if you want to talk to someone about your escrow account? Contact your lender. This may get confusing if your original lender has sold your account to another lender. But, again, regulations require that you be notified by the lender as to who is going to be servicing your loan. The new lender must provide you with a toll-free number that you can call for information.
The best time to deal with escrow accounts is when you apply for a new mortgage. All lenders must disclose to you at the time of application the likely hood of the servicing for your loan being sold. That is, what is the chance that you will have to call a lender halfway across the country and in a different time zone? That may mean nothing to you, but it may mean a lot. You decide.
Tip: Many lenders will waive escrow requirements. Some charge an extra fee to do this but some donít if you have a large down payment. If you donít want to pay escrow, ask the lender about a waiver. But be careful. As was pointed out earlier in this article, escrow accounts were started for a reason. It is probably better for the average borrower to have an escrow account and not have to worry about coming up with several thousand dollars at year end. Remember, you can lose your house to a tax sale if you become too delinquent on your taxes.
One last thought about escrow accounts. What would local governments do if they had to individually collect taxes for each house in the county? The cost would be prohibitive and the result would be increased taxes for everyone.
When the lenders pay taxes they send one check with a list of all the taxpayers. Thus the county government gets maybe three or four hundred lender escrow checks that cover about 90% of the homeowners in the county.
Also, if taxes were collected individually, many homeowners wouldn't have the money when it came time to pay. The government couldn't afford to pay for the services the rest of us paid taxes for because everyone didn't pay their fair share. Think about it.
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